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OUTSOURCING LEGAL SERVICES TO INDIA A CRITICAL TREND! Rajat Mittal December 01, 2005 Professor Amar Gupta MAP 589: Professional Outsourcing 1 ABSTRACT Outsourcing has become one of key „ingredient‟ in formulating overall corporate strategy for many U.S companies to succeed in today‟s emerging and highly competitive global marketplace. It is now being considered as one of “must-do” management practices for companies to excel globally. For many companies, it has strengthened their competitive position, predominantly true for companies competing via offering low cost for their products and services. The prior success in outsourcing non-core business activities to low wage but higher skill countries has triggered many U.S companies to explore new opportunities in outsourcing. This will enable them to boost their firms‟ profits while maintaining high quality of services rendered. Following the exodus of IT & IT enabled services (ITES); outsourcing of legal services to India seems to be next lucrative opportunity for many U.S companies. The main objective of this paper is to underscore the opportunities and challenges associated with outsourcing legal services to India. In addition, an attempt is made to quantify the future implications, both positive and negative, associated with outsourcing legal services by U.S companies. This paper is structured in five sections beginning with introduction to outsourcing, overview of legal services industry in United States, understanding the driving forces for outsourcing legal services, discussing challenges and risks involved, and finally briefing upon the future outlook on outsourcing of legal services. 2 TABLE OF CONTENTS I. INTRODUCTION Outsourcing – An Overview…………………………………………………....4 Current BPO Market………………………………………………………....…5 II. PRESENT OUTLOOK OF LEGAL SERVICES INDUSTRY Legal Service Industry – An Overview………………………………………...6 Legal Services Outsourcing – Current Market Situation.....................................6 Legal Profession in USA……………………………………………………….7 Offshorable Legal Services……………………………………………………..8 Business Models in Legal Outsourcing………………………………………...9 III. LEGAL OFFSHORING: BENEFITS…………………………………………10 IV. LEGAL OFFSHORING: RISKS & CHALLENGES…………………......…12 V. FUTURE OUTLOOK……………………………………………………………13 References……………………………………………………...………………..15 Exhibits…………………………………...………………........…………...16 - 19 3 INTRODUCTION Outsourcing – An overview Outsourcing can be defined as delegation of one or more (non-core) business processes to an external supplier, who in turn owns, administers and manages those processes based upon predefined and measurable performance metrics. It is a business decision that is often made to focus on core competences.1 Offshore outsourcing is one in which the supplier of outsourced services is based in a distant country, meaning in a country other than where the products or services will be sold or consumed. For the sake of simplicity, we will use „outsourcing‟, „offshoring‟ and „offshore outsourcing‟ as synonymous terms in this paper. There are many motivating factors for a company to consider outsourcing. Huge cost savings and increased focus on core business functions being the most imperative ones. With prudent use of outsourcing, companies can boost their profits by exploiting the wage differential (often termed as „labor arbitrage‟) that exists between their domestic market and the offshore country considered for outsourcing. The savings derived can be as high as 60%-80%, net of outsourcing overheads2. In addition to this, it also strengthens a company‟s position to focus on its core business functions. This is because it frees up company‟s resources (esp. time and money) from performing non-core activities. These freed resources can be used more productively and efficiently in managing core business operations. However, rampant growth in the practice of outsourcing has raised a number of political and social concerns. On one hand, it helps in creating new employment opportunities within offshore country but on the other hand, it results in short-term cutback in domestic jobs within countries doing outsourcing. In addition to this, it also raises issues pertaining to the quality and confidentiality of specialized and sensitive work that gets outsourced to a foreign country. Major concerns like ones mentioned above have swept United States over the issue of outsourcing in the recent past. Outsourcing of jobs, especially white collar jobs to India has emerged as one of hottest issues in United States. 4 In view of above mentioned key benefits and risks involved with offshore outsourcing, it has becomes quite difficult to label outsourcing as “purely good” or “purely bad” for U.S economy. Those who see economic welfare as synonymous with consumer welfare view outsourcing in a more positive light because it lowers price and boosts competition. Likewise, those who see investor interests as paramount, view offshoring as an unalloyed plus.3 In contrast, those who equate economic welfare with welfare of workers see offshoring as boosting economic churns and increasing unemployment. Therefore over time, two main ideologies have essentially evolved, demarcating proponents from the opponents of outsourcing. The proponents of outsourcing are primarily supporter of “free trade” i.e. international trade of goods, services, labor, and capital without any tariffs or other trade barriers. On the other hand, opponents of outsourcing have an inclination towards “protectionism”, i.e. protecting a nation's manufacturing base from the effects of outsourcing by means of very high tariffs on imported goods, restrictive quotas, or other means of reducing importation. History has shown that whenever America had to choose its growth path, be it the threat imposed by the imports of Japanese cars in the 60s, or the import of electronic goods in the 70s and 80s, America did not opt for protectionism.4 Current BPO (Business Process Outsourcing) Market The total global spending on business process outsourcing (BPO) in 2005 stands at around $140 billion and is expected to grow at 10% to reach $220 billion by the end of 20105. Considering this huge market potential for outsourcing, only tip of the iceberg has been captured so far. United States remains the biggest customer, accounting for around 59% of total worldwide spending on outsourcing, while India and China emerged as the biggest suppliers of outsourced services, primarily in IT and manufacturing respectively. Some of the other major countries that provide outsourcing services are Russia (Programming and R&D), Ukraine (Programming and Design), Romania (Programming and IT), and Philippines (Data Entry and Customer Support).6 In search of new opportunities in outsourcing, three main BPO segments have been identified. They are Logistics ($140.7 billion), Facility and Operations management (120.6 billion), and Legal Services ($111.2 billion) 7. It is expected that outsourcing of 5 these services is likely to boom in coming years with India being the most preferred nation as supplier. The following section briefs upon the present outlook of legal services industry in United States and will underscore potential outsourcing opportunities within this industry. PRESENT OUTLOOK OF LEGAL SERVICES INDUSTRY Legal Service Industry – An Overview Different mixtures of legal systems and institutions exist in the world today. By the term "legal system", we mean an operating set of legal institutions, procedures, and rules. A legal system refers to the nature and content of the law, the structures and methods whereby it is legislated upon, adjudicated upon and administered, within a given jurisdiction.8 Two of the major legal systems that still exist today are English Common Law and French Civil Law. English Common Law systems, founded in England, depend heavily on the judiciary to develop law in opinions that build upon historical precedent. In contrast, civil law systems, founded in France, depend on the legislature, often working closely with the executive, to write the law in statutes. Here, the judiciary‟s role is largely limited to ensure that the will of the government is enforced. Thus, common law nations have a far greater degree of judicial independence, while civil law countries have a lower level of scrutiny of executive actions.9 Recent research has confirmed that economic growth in common law nations is at least one-third faster than in civil law countries. In addition, a strong positive association if also found between common law status and higher rates of real per capita GDP growth. Many nations, including the United States and India, base their legal systems on the English common law tradition. Furthermore, U.S. legal system is conspicuously defined by international, national and state level laws. While the international and national laws are same across all states, the state laws can differ significantly across different states. For example, it is much easier to practice law for a legal professional in New York than in Massachusetts or Arizona. Reason being, different level of barriers within different states. 6 Legal Services Outsourcing – Current Market Situation The worldwide spending on legal services in 2005 is estimated to be around $250 billion. Of this amount, about two-third (≈ $170 billion) is accounted for legal services in United States (US) alone.10 With global marketplace becoming increasingly competitive, many US corporations and law firms are forced to streamline their operations and cut costs in order to maintain profitability. Increasing pressures from their clients to reduce costs has given them an opportunity to look at various alternate sourcing methods, amongst which outsourcing of legal services to India seems to be one of the most lucrative option. Since every type of legal service can not be outsourced, the market potential for offshorable legal services stands at around $111.2 billion. Of this amount, only 3.6% ($4 billion) is currently addressable within Indian markets, of which only 2% ($80 million) have been tapped so far11. Hence, there exists huge potential within this significantly untapped market. The pie graph drawn in figure „1‟ gives a pictorial representation of current market situation: Figure „1‟ Legal Profession in USA Legal profession in United States is considered to be one of most elitist professions today. Being a lawyer in U.S has always been a privilege for any citizen aspiring to be in this profession. High pay scales, elevated status, and challenging work environment are some of the factors that typically motivate many students to graduate in legal profession. 7 As of May 2004, total number of legal professionals in United States stood close to 1 million, comprising of Lawyers; Administrative Law Judges, Adjudicators, and Hearing Officers; Arbitrators, Mediators, and Conciliators; Judges, Magistrate Judges, and Magistrates; Paralegals and Legal Assistants; Court Reporters; Law Clerks; Title Examiners, Abstractors, and Searchers; and Legal Support Workers.12 The breakdown of total count for every work type is plotted in figure „2‟ below: Figure „2‟ Arbitrators, mediators, conciliators Admn. law judges, adjudicators, hearing officers Court reporters Work type --> 4,940 14,830 15,520 25,500 43,300 53,700 69,590 210,020 521,130 0 100,000 200,000 300,000 400,000 500,000 600,000 Judges, magistrate judges, and magistrates Law clerks Title examiners, abstractors, searchers Legal support w orkers Paralegals and legal assistants Law yers Offshorable legal services Total em ployed --> Source: U.S. Department of Labor, Bureau of Labor Statistics Offshorable Legal Services As previously mentioned, every type of legal service can not be potentially outsourced. This is because American state and federal laws do not permit a lawyer in India to practice law in United States. Hence, a lawyer in India can not represent any client case in U.S court sessions; can not perform on-site investigations or any other legal service that require face to face client interactions. In addition, all the work performed offshore by Indian lawyers must be reviewed by American lawyers, who ultimately bear the responsibility of the final work product delivered to their clients. The type of legal services that can be potentially outsourced without major concerns comprise of paralegal and secretarial support services (also refer figure „2‟ above) like contract drafting, preparation of legal transcriptions, litigation support, verification & documentation of legal records, assistance in preparing witnesses for trial, client billing services, corporate 8 due diligence support, patent & other general legal research.13 Exhibit „1‟ shows list of U.S law firms and corporations actively involved in outsourcing of certain substantive and administrative legal functions14. Business Models in Legal Outsourcing There are basically three noticeable trends in offshoring of legal services, which has evolved into three different business models.15 They are described briefly below: 1. Overseas companies with presence in India: Companies like General Electric (GE), Oracle, Sun and Cisco have moved some parts of their in-house legal departments to their Indian based units. This facilitates easy access of local Indian lawyers at very low wages as compare to their American counterparts. They assist corporate lawyers based in U.S and help them in many types of above mentioned legal services. This eventually helps in huge cost savings, as high as 60%-80%, net of outsourcing overheads. For example, General Electric (GE) became the first foreign conglomerate to offshore its in-house legal work to India. Its GE Plastics unit hired a lawyer to work in Gurgaon, outside Delhi, to write and review contracts with vendors. GE executives say the India team saved the company US$500,000 in 2001 and US$700,000 in 2002. Another unit, GE Consumer Finance, also used an Indian legal team.16 Meanwhile, Microsoft has outsourced patent work to attorneys in Bangalore, while the in-house legal department at American Express has also teamed up with Indian lawyers.17 (Please refer „Exhibit 1‟ for more examples) 2. Third party service providers: Foreign law firms like Allen & Overy, Baker & McKenzie, and Hammonds Direct, affiliates with Indian companies like Pangea3, Mindcrest, Manthan Services, Intellevate LLC, Office Tiger, Lexwerx etc. who operates like a third party service providers. (Please refer „Exhibit 1‟ for examples) 3. Publishers: Publishing companies outsource legal work through opening of pilot offices in Indian cities e.g. West/Thomson is running a pilot office in Mumbai, India, where several Indian lawyers are preparing summaries of unpublished U.S. court decisions. (Please refer „Exhibit 1‟ for examples) 9 LEGAL OFFSHORING: BENEFITS Law firms and corporations in U.S can benefit significantly from offshoring legal services to India. It will not only help them in saving millions of dollar each year, but will also provide easy access to highly skilled legal professionals in India. More importantly, it will help them in meeting steady growth in demand for legal services in United States. These benefits are explained below in further detail: 1. Meeting steady growth in demand for legal services: The legal services sector has experienced a steady and continuous growth in the past decades, mainly as a consequence of the growth in international trade and due to emergence of new fields of practice. Sectors such as corporate restructuring, business law, privatization, mergers and acquisitions, intellectual property rights, new financial instruments and competition law have generated an increasing demand for more and more sophisticated legal services in the past years. Unfortunately, there are no comprehensive disaggregated data on the size of the sector, as legal services are often bundled together with other professional services or business services18. But one thing is clear that the steady growth in demand for legal services has always exceeded the supply from law firms, and hence offshoring would help them in meeting this shortage, thus attaining demand-supply equilibrium. 2. Huge cost savings: With associate lawyers in the U.S carrying a price tag of $225 per hour in their first year and $450 per hour in their eighth, it was only a matter of time before law firms sought to outsource some of their more mundane tasks to cheaper countries like India.19 With the rate of pay at between 10%-15% of that of U.S lawyers, the cost of doing business in India is extremely low with caliber of work product being extremely high. This wage differential (often termed as „labor arbitrage‟) has been one of critical factors for many U.S law firms to consider outsourcing that will allow them to remain competitive in the marketplace. As a result, the overall savings derived can be as high as 60%-80%, net of outsourcing overheads. More importantly, these savings will tickle down to law firms‟ client and general public making legal services more affordable than ever before. The 10 following chart shows the comparison between average salaries of legal professionals in U.S and India: Average Salary / Hr. --> Average salary / hr. of legal professionals in USA $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 Law yers Paralegals Legal support w orkers Abstractors Law clerks Judges Court reporters Admn. law Arbitrators judges, adjudicators $18.93 $22.63 $16.92 $42.96 $38.42 $29.08 $19.95 $35.44 $52.30 Mean Salary of a legal professional in India (b/w $2.19/hr. to $6.09/hr. ) Work Type ---> Source: U.S. Department of Labor - Bureau of Labor Statistics and www.payscale.com 3. Access to abundant legal talent: Every year, India churns out close to 300,000 law graduates. With the job market being largely supply driven, it is good news for both U.S law firms as well as law students in India.20 Large number of law students graduating each year will ensure steady supply and will help India to emerge as the hub of outsourcing business in legal services. Access to highly skilled legal talent at a significant wage differential will maintain high quality, thereby increasing overall productivity. 4. 24 x 7 operations: U.S firms can also advantage from time zone differences between U.S and India, thus enabling 24 x 7 operations. It will shorten lead times in delivering end work product to client thereby boosting competition and increasing client satisfaction. 5. English language expertise: The medium of legal education in India is English with most of the laws rooted in English Common Law. Hence, it will be an added advantage as minimal training will be required (if any) to prepare Indian lawyers for delivering high quality error free work. 11 LEGAL OFFSHORING: RISKS & CHALLENGES Along with many advantages listed above, legal offshoring also brings some major challenges, which must be taken into account before law firms embark upon outsourcing legal work at full-scale to India. Some of potential concerns and challenges associated with offshoring legal work to India are discussed below in detail: 1. Cutback in domestic legal jobs: With the advent of offshoring, one of the major and perhaps the most critical concern would be the reduction in domestic paralegal and secretarial support jobs that will be outsourced to lawyers in India and other low wage countries. In short-term, this can turn out to be main factor, limiting the offshoring of legal services. While forecasting the number of legal jobs likely to be outsourced in the next decade is difficult, a reasonable estimate comes from Forrester Research. Figure „3‟ shows the estimated number of legal jobs that are likely to be affected as a result of this critical trend. Number of legal jobs likely to be outsourced to India 80,000 70,000 74,672 Number of jobs --> 60,000 50,000 40,000 30,000 20,000 10,000 1,793 0 2000 2005 2010 (E) Year --> 2015 (E) 14,200 34,673 Source: Forrester Research Forrester research goes further to project that by 2015, there will be 489,000 U.S lawyer jobs moving to lower cost countries, of which around 74,672 will move to India alone21. 12 2. Maintaining Attorney – Client confidentiality: With offshoring of legal data to a foreign country, maintaining client confidentiality and privacy would emerge out as another important concern. Domestic law firms in U.S will have to address data security concerns associated with legal offshoring. One method to sanitize the transmission of information between U.S and India offices would be to conceal all client and party names, commercial information, and all other case specific information before transmitting legal documents out of U.S offices. 3. Initial cost of training to maintain quality: In spite of offshoring legal work to India, American lawyers will ultimately have to bear the responsibility for the end work product that is delivered to their clients. To maintain desired quality levels, many U.S law firms are focusing on training Indian lawyers. This will enhance the quality of work product from Indian lawyers, and in due course will become equal to the quality of the work from American lawyers. Training is provided either in-house, or by flying trainers to India. In addition, Indian lawyers are constantly supervised by senior counsel in U.S. But in the long run, this supervision will be no longer be required as Indian lawyers with good credentials and good work experience will be quick to pick up the needs of their principals. 4. Regulatory scrutiny: The hype of offshoring legal services has attracted regulatory scrutiny and over 112 anti-outsourcing bills are coursing their way in some 40 states in the U.S. Since 2006 is election year for the U.S Congress, heightened concerns about jobs being snatched away by cheaper markets runs-up to the elections. For politicians to cash in on this is par for the course.22 FUTURE OUTLOOK Offshoring of legal services is at a critical stage of expansion and adoption. Presently at a nascent stage, it is likely to record exponential growth in years to come as a result of demonstrated benefits of outsourcing. This trend seems to have tremendous potential to create a boom in U.S legal industry and we expect to see more and more companies outsourcing their legal work to offshore countries. The trigger can come from companies 13 based in New York as the state boasts of its most non-discriminatory foreign laws amongst 50 states in the country. In effect, the future of this industry seems to be very promising if all the concerns discussed above are managed and addressed in a controlled and informed manner. But speaking of more recent times, the outsourcing of jobs, especially white collar jobs to India has emerged as one of hottest issues on the presidential campaign.23 Senator Kerry has been outspoken in his criticism of the practice. For this reason, some law firms have decided to take a wait and see attitude and many industry experts have predicted that the legal outsourcing trend will stall until after the presidential elections. However, other law firms are progressive and keenly interested in reducing costs and increasing responsiveness. For these firms, the political debate has actually raised awareness of offshoring as well as entrenched business trend.24 As law firms and legal departments examine the impact of offshoring, they inevitably conclude that it is a business practice that is beneficial for their business and American businesses overall. But in order to be successful, companies must prepare a sound strategy and clear guiding principles for implementing this new and emerging offshoring trend. If handled badly, legal services outsourcing can damage corporate image, sour relationships with clients, and result in lower quality of services. But when handled well, the results can be good enough to save a failing corporation. 14 References: 1. Wikipedia, the free online encyclopedia 2. Express computer India -“Indian BPO flies high despite backlash” by Chris Ann Fichardo 3. “Understanding the Offshoring Challenge” by Robert D. Atkinson 4. “Indian BPO flies high despite backlash” – News analysis report by Express Computer India. 5. Source: LogicaCMG, August 2005. 6. Wikipedia, the free online encyclopedia 7. Source: NASSCOM 8. Hayek, F. A. 1945. The Use of Knowledge in Society. American Economic Review 35(September): 519–30. 9. Mahoney, Paul G. 2001. The Common Law and Economic Growth: Hayek Might Be Right. Journal of Legal Studies 30(June): 503–25 10. Source: Forrester Research (www.forrester.com) 11. India BPO flies high despite backslash – NASSCOM 12. U.S Department of Labor, Bureau of Labor Statistics 13. Playing on a new court – Moumota Bakshi Chatterjee 14. Outsourcing Legal Services – Joy London 15. Outsourcing Legal Services to India www.globallawreview.com/outsourcing.html 16. In-house or Outsourced? The future of Corporate Counsel – July/August 2005 Asia Law 17. In-house or Outsourced? The future of Corporate Counsel – July/August 2005 Asia Law 18. “Council for trade in services” - (WTO) 19. “Legal Process Outsourcing (LPO) Shows High Growth Potential” – Outsourcing Times. 20. India to grab 35K U.S law jobs by 2010 – The Economic Times of India. 21. Source: Forrester Research (www.forrester.com) 22. Outsourcing: 100 U.S Bills target India – The Economic Times of India 23. & 24. U.S Legal Outsourcing to India growing in 2004 – The Times of India 15 EXHIBITS 16 Organization Organization Type Corporation Services Law dept. support (contracts) Law dept. support (patents) Law dept. support (contracts) Patent work Patent work Document processing Network ops & doc processing Litigation Support Tech, finance, admin Legal research Legal research Secretarial & admin support Various services Reception, telephone & fax services, mailroom, printing & reprographics & hospitality functions Legal research, paralegal, docketing IP work & Location Mauritius Source | Notes See Corporate Legal Times article, Sep 2004, reports company has set up owned & operated office in Mauritius for company legal work. See Outsourcing Reaches Corporate Counsel, The Recorder, 8/25/04 Date Added Mar 05 Accenture Andrew Corp Corporation NZ Mar 05 General Electric Corporation India See Outsourcing Reaches Corporate Counsel, The Recorder, 8/25/04 Mar 05 General Mills Corporation Corporation Law Firm Law Firm Law Firm Law Firm NZ and Australia India India Philippines India US (Wheeling, WV) India India US (Fargo, ND) India Scotland See Corporate Legal Times article, July 2003 Mar 05 Mar 05 May05 Mar 05 Mar 05 Mar 05 Microsoft Allen & Overy See Briefed in Bangalore American Lawyer, Nov 2004 See http://www.lwk.co.uk/ViewItem.asp?id=16509 Baker & McKenzie See http://www.lwk.co.uk/ViewItem.asp?id=16509 Bickel & Brewer See Briefed in Bangalore American Lawyer, Nov 2004 Orrick Herrington See http://www.orrick.com/offices/goc/ Atlas Legal Research Brigade CBF Group Vendor Vendor Vendor Vendor Vendor See Briefed in Bangalore American Lawyer, Nov 2004 Mar 05 Aug05 Mar 05 Aug05 Conveyancing Hub Docuserve See http://news.scotsman.com/index.cfm?id=199662005 eCase Solutions Vendor India May05 Evalueserve Vendor India Mar 05 17 market research Intellevate LLC Vendor Paralegal, docketing, technical research, proofreading, bookkeeping Prep legal docs relating to employees Word processing, legal research, others Legal transcription, legal coding Paralegal and PSL support Legal work Legal research, IP analytics, doc review, back office Transcription, coding, billing, secretarial, paralegal Legal research IP, research, drafting Documentation, lit supp, acctg+billing, research, online due diligence Legal research Case management, legal transcription, India See http://www.practicesource.com/ale /blog/pivot/entry.php?uid=standard-532 Mar 05 Intelladigm Vendor India and Michigan India Aug05 Integreon Vendor May 05 Intercom India Vendor India See http://www.globallawreview.com/outsourcing.html# Annexure Mar 05 Kaioko Vendor Vendor Vendor India S. Africa and UK India See Legal Process Outsourcing (PDF); JV between UK company and Indian law firm (ALMT Legal) See http://www.lawabroad.co.uk/outsourcing.php May 05 Mar 05 Mar 05 Law Abroad Lawwave See India Abroad article, Jan 04 Legal Source India Vendor India Aug05 Lexadigm Lexecute Vendor Vendor Vendor India India and San Jose India Mar 05 Aug05 Aug05 Lexquisite Lexwerx Manthan Services Vendor Vendor India India See http://www.globallawreview.com/outsourcing.html# Annexure Mar 05 Mar 05 18 data digitization & archiving Mindcrest Vendor Legal process outsourcing, legal research & business research services Doc review; contracts; legal research; biz info research Document processing, legal research, professional support, finance & accounting services Legal support services Legal research and research support Various services Patent search; paralegal support Legal research and drafting India See http://www.globallawreview.com/outsourcing.html# Annexure Mar 05 Pangea3 Vendor India See blogger interview of founders May 05 OfficeTiger Vendor India See http://www.hildebrandt.com/Documents.aspx?Doc_ID=18 02 Mar 05 QuisLex Vendor Vendor India India Mar 05 Aug05 Socrates CMS Thuriam Vendor Vendor India India See http://emediawire.com/releases/2005/4/emw224959.htm Aug05 May05 TMP Searchers Verist Vendor India Aug05 19